risk management_a case study

risk management_a case study - Part 2: Buying, Financing,...

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Part 2: Buying, Financing, and Closing 4. A)Purchase Price = $124,000 B)Earnest Money = $ 9,000 C)Down Payment = $ 9,000 D)Mortgage Amount = $115,000 5. A) A 30-year fixed rate mortgage is one that will be paid off in full in 30 years. The payments on this type of mortgage are equal for the life of the loan. The payments may increase or decrease depending on if the insurance and taxes are rolled into the payment. But the payment of principal and interest will remain the same. If the client chooses to go with a term of 15 years, then the payments will be higher than a 30-year fixed. But the loan will be paid off in half the time and interest charges will be less. The main disadvantage to a fixed rate mortgage is that to take advantage of lower rates, one would have to refinance the mortgage. A 15-year adjustable rate mortgage is one where the interest rate will fluctuate over the life of the mortgage. It will generally have a lower rate (1 to 4 percent) in the beginning years than a fixed rate mortgage. The difficulty with ARMs is that the rate can go up significantly over the life of the loan, if there are not interest caps in the contract. At the end of the adjustment periods the interest rate is changed based on the index it is tied to. The main advantage is the lower rates at the start of the loan. 5. B) 30-Year Fixed from www.hsh.com For the values you entered: Principal= $115000 Interest Rate= 6.5% Amortization Period= 30 years Starting month= Jan Starting year= 2006 Monthly Pre-payment= $0 Annual Pre-payment= $ 0.00 Your monthly payment will be $ 726.88 15-Year Fixed from www.hsh.com For the values you entered: Principal= $115000
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Interest Rate= 6.5% Amortization Period= 15 years Starting month= Jan Starting year= 2006 Monthly Pre-payment= $0 Annual Pre-payment= $ 0.00 Your monthly payment will be $ 1001.77 15 - ARM from www.calculators4mortgages.com Used this website instead of www.hsh.com because we could not manipulate the calculator to do an ARM. Also ran on www.calculators4mortgages.com the Fixed mortgages and found the same answers as on www.hsh.com . We will be using the table below when we discuss the loan options with the Brown’s. When we deal with amortization, we will be using other information from www.hsh.com . Loan Type Fixed Fixed ARM Loan Term (Years) 30 15 15 Interest Rate 6.5% 6.5% 4.0% Loan Amount $115,000.00 $115,000.00 $115,000.00 Total Payments $261,674.84 $180,319.65 $187,731.48 Total Interest Paid $146,674.84 $65,319.65 $72,731.48 Total Principal Paid $115,000.00 $115,000.00 $115,000.00 We would tell the Brown’s that if they are looking for a payment that is not going to fluctuate as much then they should go with a fixed mortgage. On the ARM mortgage, year 1 payment would be $850.64, year 2 = $934.23, year 3 = $1016.76, and year 4 through 15 = $1070.22. The initial payment would be in the middle of the two fixed; but after that it will go up year by year. If they were able to afford the extra $275 each month
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This note was uploaded on 04/17/2010 for the course FFP 541 taught by Professor Swanson during the Summer '06 term at Iowa State.

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risk management_a case study - Part 2: Buying, Financing,...

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